CTT will take commodities trading business away from Indian markets

Published: Wednesday, April 23, 2008, 19:05 [IST]

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New Delhi, Apr 23 (UNI) The incidence of proposed Commodities Transaction Tax (CTT) will increase cost of transactions, create arbitrage between unorganised and organised Commodities Markets and drive Commodities trading business away from Indian markets, an industry body said today.

''The commodities derivatives market being only four years old is currently at a nascent stage in India. Participation of banks, mutual funds, Financial Institutions (FIs), Foreign Institutional Investors (FIIs) is still not allowed. Options contracts, index futures and futures based on intangibles are still to come,'' a statement from the industry chamber CII said.

The chamber said the commodities market first needs organised growth and deepening in terms of types of instruments and participants, to attain its full potential before it could be taxed.

Also since commodities derivative contracts are based on physical deliveries unlike stock F&0 contracts, which are cash settled contracts, existence of STT does not justify imposition of CTT, the statement added.

The Budget 2008-09 proposes to levy CTT to the extent of 0.017 per cent on sale of all commodities derivatives contracts besides a service tax at the rate of 12.5 per cent on the transaction fee earned by the commodities exchanges.

CII said that while the commodities exchanges might be able to cope with the application of service tax, the incidence of commodities transaction tax will be a severe blow to the existence of commodities derivatives market in our country.

The cost of transaction, per Rs 1,00,000 transaction, range from Rs 0.71 at the lower end to Rs 7.50 at the upper end in different countries' commodities derivative markets.

Currently the cost of transaction at Indian Commodities Derivatives Markets is Rs 2, which will be Rs 19.25 after the imposition of CTT.

Moreover, CTT is not applicable in any other country. Therefore, Indian commodities exchanges have to be at par with international markets with respect to cost of transaction, otherwise the entire volume will shift either to unorganised market or to other international exchanges.

The chamber is of the view that CTT will also create distortions in prices, create divergence of spot and futures at maturity and send wrong price signals, as physical market exists outside the purview of electronic exchanges.

''The CTT will also create a regulatory arbitrage between national electronic commodities exchanges and regional ring based exchanges. Apart from three national exchanges, there are 22 regional commodities exchanges and as per policy followed by the regulator, they are not under any compulsion to implement online trading. Thus, CTT will aggravate the already existing problem of under reporting of transactions,'' the statement said.

The industry body opines that CTT would be an additional burden on commodities market, which is already subject to many taxes and levies such as CST, Sales tax/VAT, excise, custom etc.

''Any additional tax burden will also impact the consumer paid price and lead to price inflation, which is already a cause of concern for the Government. Also, CTT is proposed to be levied on sellers which implies that a farmer, who sells a futures contract to protect himself against price risk will be required to pay CTT. This seems to be a regulatory inconsistency because as per APMC Act, no tax, cess or mandi fee is payable by the farmers,'' the statement said.

The chamber said that commodities trading should be exempted from applicability of any transaction tax completely failing which the market would become highly unviable, inefficient and illiquid and the worst sufferer would be the Indian trade and industry, which has just begun to use this market for improving their pricing efficiency.

Further, the industry body proposes that commodities derivatives income/loss should be treated as normal business income/ loss to promote hedging by trade and industry.